Yesterday (April 6, 2009) Trading Markets posted a story “Talks Between Apple and China Unicom Suspended.” The report stated that; “Talks between China Unicom and Apple to introduce iPhone into China came to a halt as Apple was said to have asked the Chinese telecoms carrier (China Unicom) to stand costs of building Apple special stores in this country after China Unicom agreed on a profit-sharing plan proposed by Apple.”

My reaction yesterday – Wrong! And exceptionally poor background research on the part of Trading Markets!

iPhonAsia believes that Apple and China Unicom are moving rapidly to conclusion of a formal agreement to launch official iPhone models (plural) in China. So what’s with the Trading Markets story? There may well have been conversations over China Unicom sharing some expenses associated with developing Apple’s soon to be unveiled China App Store (NOT Apple brick and mortar stores as the Trading Markets report implies). iPhonAsia believes this matter is now settled. It is possible that China Unicom will indeed share some of the China App Store expenses as they may in turn receive a generous share of Apple’s slice of China App Store revenues … slightly more than ½ of the 30% share that Apple receives on app sales.

Beijing. April 7.INTERFAX-CHINA – Apple Inc. has agreed to grant China Unicom the majority share of revenues from its (China) App Store as part of ongoing discussions between the two parties regarding the introduction of the iPhone to China, a China Unicom source told Interfax on April 7.

Yes I did see it (Trading Markets article) … That is either totally bogus or a Mandarin-to-English translation goof-up. I sent two e-mails this morning to Trading Markets in an effort to set them straight. No reply, no edits made, and no surprise to me. Doing a bit more detective work … I went to Trading Market’s referenced source – ccidnet.com and translated the site to see if I could find the original article with references to “talks suspended.” Nothing close to that story anywhere on ccident.com … at least that I could find.

The best “iPhone deal” reporting I’ve seen coming from China has been from Interfax China and JLM Pacific Epoch. Both sites seem to have connections inside China’s telecom industry feeding them insider tidbits. Many Chinese media and tech sites pick up the scoop from Interfax and/or JLM Pacific Epoch and then rerun or re-edit their story.

Here is my take on this Trading Markets piece. I think a news service (possibly ccident.com) in China picked up on a sentence (“According to the source, the sticking point is the division of revenues from the online iPhone applications store”) in an article on Interfax TMT China’s weekly bulletin (subscriber only) and simply miss-read it. Any possible dispute would have NOTHING to do with Apple Stores in China (Sanlitun and soon in Qianmen). It could, however, have something to do with Apple’s China App Store.

What’s really going on here? China Unicom is purposefully leaking to the media that “all is not yet settled” and there remain some “discussion points,” including an issue over the amount of Apple’s China Application Store revenue sharing. Apple kicks 70% to developers and keeps 30% for App Store maintenance and other marketing and distribution expenses. I suspect China Unicom will be promoting many “for China” apps (within Apple’s soon to be unveiled China App Store) as part of their iPhone deal with Apple and they want more than a minority slice (more than ½ of Apple’s 30%) for select apps that China Uincom will be promoting. I’d bet this App Store revenue sharing issue has already been settled. I fully expect that senior Apple executives will be in Beijing very soon! Purpose will be to tie up any loose ends and –

Meet with China Unicom

Pay a courtesy call to China Mobile

Meet with MIIT*

Sign the deal

Much of the recent spin in the press (e.g. “deal not done” … “there are issues to resolve”) stems from China Unicom’s failure to control and contain their Shanghai subsidiary. As you no doubt heard and saw, the Shanghai Unicom subsidiary, without authorization, used images of iPhone 3G to promote their forthcoming WCDMA 3G services. This caused a major stir that reached all the way to Cupertino. China Unicom execs in Beijing had to do some fast footwork and backtracking so that they could preserve the “surprise element” (deal announcement). China Unicom also lost some face as a result of this incident. The loss of face was with
Apple and within China’s telecom industry. Many of China’s telecom pundits advised that China Unicom must immediately retract any suggestion that a deal was done. They further suggested that the only way for China Unicom to regain any leverage with Apple would be to put out stories suggesting that “issues remained to be negotiated.” Even if a deal was 100% done (and it’s technically not done until MIIT approval*), China Unicom would lose face if they did not put out some spin in the press. And that’s exactly what they did. But IMO the Trading Markets story goes way too far with the spin (intentionally miss-leading? Or a very poor translation?) and is total B.S.

Best bet for an announcement is May 17. Next best bet is WWDC in June. The May 17 date corresponds with World Telecom Day and China Unicom’s target date for trial launch of its WCDMA 3G network in 55 cities. I’m beginning to question whether May 17 will be the “announcement” day, as any such news would beg questions
over new model iPhones. It appears likely that new models won’t be unveiled until WWDC – June 8th – 12th. There won’t be any official iPhone in China launch before July 1. Could be August or Sept.

*NOTE: Ministry of Industry and Information Technology (MIIT) approval of iPhone and WVAS (e.g. App Store, iTunes) is mission critical to a formal iPhone launch. Regardless of whether Apple and China Unicom are in 100% agreement and have inked a deal, MIIT must approve.

iPhonAsia Responds to Dr. Cheng Dejie (Interfax)

Dear Dr. Dejie:

Telecom Analyst Dr. Cheng Dejie

Thank you for your interesting article. Your arguments are supported by facts, and I agree with many of the discussion points you’ve presented. Yet there is a general theme in your article that I do take issue with. That is the idea that China Unicom may regret any agreement they make with Apple that compromises their ability to control wireless value added services (WVAS).

The title of your article “China Unicom’s Apple deal may leave a sour taste” clearly implies that a deal with Apple might not be mutually beneficial. I would disagree. China Unicom has had ample opportunity to conduct their due diligence and analyze the market opportunities that iPhone presents. To conclude that China Unicom may be taking steps that will not be in their long-term best interest is, in my opinion, an underestimation of China Unicom executive management’s business savvy. I would agree with your point that any successful negotiation with Apple would require that the iPhone (Apple) retain control over many core wireless value added services (WVAS), such as iTunes and the Apple App Store. However, I think you will be surprised to find how ready, willing, and able Apple is to make strategic compromises to better serve Chinese wireless consumers.

I believe in the long run, focusing on what’s best for the Chinese consumer, will prove to be the winning strategy for China’s wireless telecom companies. In the past, many carriers imposed their will on handset manufacturers. Many phones were customized to suit the carriers’ branding and proprietary services. Industry insiders often referred to these customized handsets as “crippled phones” due to their ability to serve only one master … the carrier.

That was then, this is now. On January 9, 2007, during the MacWorld Keynote, Steve Jobs unveiled the iPhone, the first truly “smart” mobile device to converge cellular service with music (iTunes) and the real Internet (not a WAP). Millions of consumers were immediately smitten. Of course iPhone did not receive uniform praise. The loudest “boos” came from competing manufacturers/carriers and their paid “media savvy” consultants. But the consumer wasn’t listening to pundits and critics. All they had to do was pick up an iPhone with its vibrant screen, Safari browser to the real Internet, highly intelligent and intuitive user-interface (no manual necessary), and they were convinced. It was a “must have.” What’s more, the iPhone is not a prisoner to fix buttons. It is designed to evolve. Evolution is part of Apple’s promise to buyers; a promise that Apple has delivered on again and again. My own 1st generation iPhone has now been (easily and at no cost) upgraded multiple times and I’ve downloaded dozens of cool and fun applications.

800 million downloads!

I am not alone in enjoying the iPhone evolution/revolution. Over 17 million iPhones have now been sold and as of March 17, 2009, after only 8 months of operation, an astounding 800 million applications have been downloaded from the Apple App Store hosting over 25,000 applications. And now the 3.0 OS upgrade will take iPhone to a whole new level. The game changed forever on January 9, 2007. A paradigm shift is underway and mobile communications will never be the same.

Back to the key question you raised in your article… “Who can or should control the WVAS?” Right now everyone (carriers and OEMs) is charging full-speed ahead to build their own app store and proprietary value-added services. Some may succeed, and others will no doubt waste 10s of millions in a vain effort to create a winning platform. I believe carriers that elect to build their own WVAS and also embrace smart phone manufacturers’ WVAS will wind up the winners. This openness will also make for happier wireless consumers.

I am not privy to any of the plans or strategies that may have come from current Apple and China Unicom negotiations. One might imagine that China Unicom will pursue their own WVAS while at the same time allowing iPhone subscribers to enjoy many of the current Apple services. Apple and China Unicom can learn from one another and forge a successful partnership. This partnership can be financially rewarding for both Apple and China Unicom. Most importantly, Chinese wireless consumers will be the biggest beneficiaries of this partnership.

Consider that Apple has gone to great lengths and expense to make the App Store a true e-commerce vehicle for developers who receive a 70% share of all application revenues. There is no question in my mind that

iPhone integrated with peripheral

Apple would work closely with China Unicom to ensure that there are a wealth of “for China” applications on Apple’s China App Store. I suspect that several new iPhone applications will be developed directly by China Unicom, who’ll receive at least 70% of the revenue. One or two of these applications may even be preloaded on an iPhone for China Unicom. After the iPhone 3.0 OS release, applications can be developed with “in app” purchase options (e.g. online magazine subscriptions, city guides, etc.). There are also now many ways an iPhone can interact with peripheral devices. This presents additional opportunities for ongoing revenue for businesses and developers and greater “value-add” for Chinese iPhone users.

The bottom line… China Unicom’s Apple deal can be very sweet indeed.

More background on Apple and China Unicom iPhone negotiations …

NOTE: The following is based on my research together with a large measure of outright guesswork. In other words, my analysis should be filed under “rumor,” “speculation,” and “opinion.”

Gang Li

A China Unicomexecutive contingency, led by Executive Director of Mobile CommunicationsGang Li, arrived in Cupertino on Sunday, March 8th for meetings with Apple. The objective of this summit was to move iPhone negotiations to a serious level. The negotiation points likely included:

The issue of a subsidy payment from China Unicom to Apple for each “on contract” iPhone.

The issue of WiFi and China’s WAPI security standard. Apple may be required to disable WiFi on iPhone in China. This would not be unprecedented. Apple has already disabled WiFi for iPhone in Egypt.

The issue of exclusivity. Whether China Unicom will have exclusive carrier rights in PRC and whether any “exclusive” will be limited to “3G” or to all iPhone models and any other Apple 3G enabled mobile device (3G tablet).

Whether Apple will agree to pre-load iPhone with applications that are popular in China (e.g. Youku vs. Youtube).

A recent report via ccw.com.cn(传联通就引入iPhone达成协议) indicates that the China Unicom

iPhone 3.0 OS

delegation remained in discussions for a full two weeks and did not return to Beijing until the evening of March 18. It is therefore quite possible that the China Unicom team was in town for the Apple 3.0 presentation (< watch)delivered at Apple’s HQ in Cupertino on St Patrick’s Day (March 17). My guess is that the China Unicom executives were sequestered in the upstairs conference room (above Apple’s Town Hall facility) where they could watch the iPhone 3.0event by closed-circuit television. This extra discretion would be important as the national media was invited to the 3.0 event and a group of well-dressed Chinese gentleman would raise journalists’ curiosity, and might cause the press to connect the dots to China Unicom. Apple and China Unicom would prefer that any “deal” remain a secret until all formal agreements and China Ministry (e.g. MIIT) approvals are signed sealed and delivered.

What are the final steps? The deal may be concluded after the Ministry of Industry and Information Technology (MIIT) gives iPhone its official approval (soon). There have been reports that Apple provided China Unicom with a non-WiFi iPhone for final MIIT tests. Another key step might be an Apple visit to

China Unicom Chairman Chang Xiaobing

China. My guess is that a group of senior Apple executives will travel to Beijing to meet with China Unicom CEO Chang Xiaobing and other executives. This would be a professional courtesy and show of respect for the China Unicom delegation that recently visited Cupertino. It would also be an opportunity for Apple to meet with Lou Qinjian, Vice Minister of China’s MIIT. There is also the possibility of a side trip to meet with China Mobile CEO Wang Jianzhou and continue those “cooperation talks” that we’ve heard so much (or so little) about. Spring is a nice time of year to visit China. There are sites to see after all.

May 17 for an announcement with a launch this summer?

There have been several reports suggesting that an official iPhone agreement between Apple and China Unicom could be announced on May 17. This is the same day that China Unicom will be launching, on a trial basis, the new W-CDMA 3Gnetwork in 55 major Chinese cities. The full network (283 cities) rollout will not happen until the end of 2009. May 17 appears to be about the right timeframe to make an official “iPhone in China” announcement; however, an iPhone launch may need to wait until the summer months. Apple’s Worldwide Developer Conference is often scheduled for mid-summer and that might be the right forum to unveil new iPhone models. I would not expect a China launch until Apple has formally unveiled their “gen 3” mobile devices. It should be a busy summer in Cupertino and in Beijing.

What’s going on between Apple and China Mobile?

As for the prospects of an iPhone deal with China Mobile … A “3G” deal looks doubtful, a “2G” deal is possible, and a “4G” deal will likely remain an open topic of discussion.

I agree with part of the statement you made in your article; “Apple clearly stated that it will not include TD-SCDMA functions in its handsets, which totally ended negotiations.”

I know that Apple has not commented on TD-SCDMA and I doubtthat China Mobile would ever publicly admit that TD-SCDMA 3Gis a “deal breaking issue.” However, I absolutely do believe that TD-SCDMA network concerns have been a major factor in Apple’s decision tree. More on TD-SCDMA issues later…

The public reasons (leaked to Chinese media) given for Apple and China Mobile’s failure to come to terms have been over control of the App Storeand WVAS. It appears that China Mobile pushed hard in an effort convince Apple to remove services from the iPhone (no WiFi, no App Store, no iTunes, etc.) in favor of China Mobile’s own WVAS. If the press rumors are true, Apple said “No!” I don’t blame them. A “stripped down” iPhone morphs into something that Apple would not want to call “an iPhone.” It’s really that simple.

Apple “cooperation talks” continuing with China Mobile? …

China Mobile CEO, Wang Jianzhou

Despite divergent views over who (Apple or China Mobile) should control WVAS on iPhone, and TD-SCDMA concerns, I am not sure that discussions have “totally ended.” According to China Mobile CEO Wang Jianzhou, Apple and China Mobile are (or were) “still talking” under a non-disclosure agreement (NDA). An interesting quote on March 5 from China Mobile CEO Wang Jianzhou: “We hope the iPhone can be used on China Mobile’s network, and Apple has demonstrated its will.”

What might be going on in these reported “talks?” I honestly have no idea. It could be something big, something small, or nothing at all. Here are a few possibilities:

Apple and China Mobile could be discussing an EDGE 2.5 G iPhone Nano (iPhone Nano [if it exists] might be a 2.5G model, and this might not conflict with a negotiated “3G” exclusive for China Unicom)

China Mobile may be discussing a future TD-LTE Phone 4G (at least18 months down the road)

China Mobile may also be considering ways to retain existing iPhone users. China Mobile has approximately 1,000,000 iPhones now running on their EDGE 2G network. At least ½ of those are the new iPhone 3G and many of these handset owners are not on contract (290 million of China Mobile’s 463 million users are pre-paid and can freely switch carriers). If China Unicom lands the iPhone, they will no doubt attempt to entice existing iPhone 3G owners to “upgrade” to 3G.

China Mobile going for full control of WVAS…

China Mobile has made no secret of their intent tobuild their own app store (to be called “Mobile Market”) and promote their own WVAS platform – Monternet, including music services (www.12530.com) and a Web 2.0 platform (similar to Mobile Me). China Mobile made 27% of their revenue in 2008 through their WVAS and they don’t want any leakage to handset manufacturers.

As you noted, China Mobile has already launched R&D for its ownAndroid powered mobile operating system, jointly with cell phone producer Lenovo. The new MOS has been dubbed Ophone. With its own operation system, China Mobile can install more services of its own. China Mobile has also paid Topssion and Accenture plenty of RMB to work

Levono Ophone

on customization plans for TD-SCDMA 3G handsets and perhaps to continue feed them ideas they want to hear … “you can build your own mobile OS and app store just like Apple … and here’s how can we help” (more Accenture projects and billable hours… yes, I’m a cynic).

Nokia’s concerns offer clues as to why Apple said “No” to a customized TD iPhone 3G…

This effort to integrate TD-SCDMA handsets with China Mobile’s own mobile operating system and WVAS is an expensive and risky proposition. Nokia has apparently balked at pouring their own money into this initiative. Consequently, earlier this month, China Mobile revealed that it would invest 600 million RBM with Nokia and other handset manufacturers on research and development on TD-SCDMA handsets. Why is the most dominant wireless carrier in the world (China Mobile with 463 million subscribers) dolling out R&D money to handset producers to build TD-SCDMA phones? Especially to Nokia who has dominant market-share in China (37% of handset sales in China are Nokia) and has invested heavily in maintaining good standing with China Mobile? Serious question. Why? You’d think Nokia would be falling all over themselves to rush deliver a new TD Nokia 3G phone for China.

TD-SCDMA Handsets

A large part of that answer may rest in the fact that China Mobile has an obligation to China’s Ministries to rollout the “indigenously innovated” TD-SCDMA 3G network. And yet China Mobile is now rushing development of TD-LTE 4G as fast (and quietly) as they can. CMCC will no doubt spend whatever amount is necessary to stabilize TD-SCDMA, but its future is far from certain. The tenuous future of TD-SCDMA may be a primary reason why Nokia will not take on further TD-SCDMA handset development without a cash stipend. A secondary reason may be the substantial WVAS customization China Mobile is insisting upon, along with the integration of China Mobile’s new “on the drawing board” Ophone. This is a terribly expensive undertaking for Nokia with no assurance that the customized (“crippled”) TD handsets will sell.

Why Apple said “No” to TD-SCDMA…

In your article, you questioned why Apple balked at an agreement to build a TD-SCDMA handset. In my mind, this was a “no brainer” decision for Apple. It’s my belief that Apple went to great lengths to give the nascent TD-SCDMA 3G protocol a trial, including dedicating engineering resources and possibly some design/build efforts. But any special TD iPhone 3G model is likely to remain under “lock-in-key” in the engineering vaults in Cupertino.

Why would Apple say “No” to TD-SCDMA 3G? …

China Mobile’s “end run” rush to build TD LTE 4G is a statement that TD-SCDMA may have a very limited life span (2 years or so).

TD-SCDMA 3G iPhones would not be usable outside of China, albeit they would likely be backward compatible to 2G EDGE networks.

China Mobile has blamed the current crop of TD-SCDMA handsets for network usability problems. Would China Mobile reverse this “blame the phone” tactic should Apple launch a TD iPhone 3G? Not likely.

Apple understands very well that network bugs can tarnish the reputation of handsets.

Apple does not want to have their debut in China spoiled due to network reliability issues.

Despite the possible conflicts over WVAS and TD-SCDMA, it is my hope that Apple and China Mobile can find common ground and a basis to work together. A large cross-section of China wireless consumers are using China Mobile’s network and services. Whether it be a 2G iPhone Nano, or a 4G TD LTE model, it would be great to see two of the world’s most respected companies (Apple and China mobile) working together.

Thank you again for your article. I enjoyed reading it and appreciate your point of view.

Update – March 8, 2009:Interfax’s Cindy Geng is reportingthat a China Unicom delegation is visiting Apple and will conduct “decisive negotiations” on March 8 (that would be now). Cindy Geng’s report is based on an internal telecom source. The source is “confident that the talks will be successful.”

iPhonAsia has picked up from several sources in China that a March ’09 Apple/China Unicom summit would take place, however, this is the first report of a specific date. The CNFOL.com article below spells out more details on possible negotiation points (many may have already been resolved).

One other notable item from the Interfax report – “China Unicom is now preparing to obtain the network access license for the iPhone from the Ministry of Industry and Information Technology (MIIT). The MIIT refuses to test Wi-Fi capable handsets, consequently China Unicom has prepared versions of the iPhone both with and without Wi-Fi.”

Meanwhile … China Mobile continues in “cooperation talks” with Apple over releasing the iPhone. China Mobile CEO Wang Jianzhou, March 5, 2008:“We hope the iPhone can be used in China Mobile’s network, and Apple has demonstrated its will.”

China Unicom to Meet with Apple over iPhone

Here are a few key takeaways from an extensive iPhone in China article posted today in a China tech blog Computer Reporter by Tao Yuanli.

NOTE: The excerpts below have been translated from Mandarin by iPhonAsia. Apologies for less than perfect translation. The full article is available HERE in Mandarin.

Lou Qinjian, Vice Minister MII

Ministry Information Industry Ministry (MII) Vice-minister Lou Qinjianconfirmed that China Unicom is “engaged in clandestine iPhone in China negotiations with Apple.” Lou Qinjian would not disclose any details regarding the negotiations, however he did reveal that:

In early February 2009, China Unicom began W-CDMA 3G network and the iPhone compatibility tests in the Hebei Province. The tests used the HSDPA network, and the downloading speed surpassed 150KBs. The Hebei Province migration network company involved in testing has given the tests a “satisfaction” evaluation. Thus it can be seen, that iPhone carries on the 3G network’s test smoothly.

China Unicom Chairman Chang Xiaobing

On September 16, 2008, China Unicom Chairman Chang Xiaobing indicated at the general meeting of shareholders that China Unicom will “pay attention to the commercial turning point which highly iPhone possibly brings, and hopes to begin a depth of cooperation with Apple”

It is also reported that Chang Xiaobing will go in person to Apple Headquarters in Cupertino to discuss cooperation matters. There are four (4) issues to resolve:

The issue of a subsidy payment from China Unicom to Apple for each “on contract” iPhone.

Whether Apple will agree to disable WiFi on iPhone in China. WiFi on mobile handsets does not conform to China’s WAPI standard of security

Whether Apple will agree to pre-load iPhone with applications popular in China (e.g. Youku vs Youtube).

iPhonAsia comment: There have been several reports of a planned March 2009 (that would be now) visit to Cupertino by key China Unicom executives. Here’s who iPhonAsia expects might be on the guest list:

Reuters is also quoting China Mobile CEO Wang Jianzhou as saying today (March 4, ’09) that China Mobile would “continue to talk to Apple” and he would not comment on the discussions between China Unicom and Apple. The Apple and China Mobile story is a long and winding road … If I can find a few free hours over the weekend I’ll offer up my take.

TAIPEI, March 4 (Reuters) – Taiwan electronics giant Hon Hai said on Wednesday it had recently increased its number of employees in China by 5 percent despite the global downturn.

“In the short term, things are not as bad as they are made out to be,” Chairman Terry Gou said at a signing ceremony between the company and IBM on using green technology. Gou did not specify when the company had increased its China workforce.

Hon Hai is a contract manufacturer that makes some of the world’s most famous gadgets, including Apple’s iPhone, Nokia cellphones and Nintendo’s Wii game console.

The news… The insider disclosed that China Unicom will send out high-level executives to go to the US and the Apple Company in March to discuss iPhone introduction in China. It is very possible that this link makes a final decision to introduce the iPhone opportunity. Although a previous report stated that China Unicom achieved formal agreement with the Apple Company, the “insider” indicated that definitely not yet to that stage, and called the report that “China Unicom will make the enormous concessions” to be not likely. It is reported that high level China Unicom executives will go to the US to negotiate. China Unicom Vice President Gao Guan will have the rich marketing experience.

传苹果iPhone突然牵手联通 与移动谈判破裂

China Unicom CEO Chang Xiaobing

Tech.gansudaily.com.cn is reporting that China Unicom and Apple are now engaged in serious iPhone negotiations and China Unicom Chairman Chang Xiaobing is directly involved. The report states that the objective is to launch iPhone in China at the end of May. This timeline corresponds to the launch of China Mobile’s W-CDMA 3G network.

It will finish the 3G network deployment in major Chinese cities before mid 2009 and extend the service to medium-sized cities before the end of next year, disclosed persons in the know.

China Unicom Board Chairman and Chief Executive Officer Chang Xiaobing earlier said that the company’s expenses on the mobile communications field, particularly on the 3G segment, would total around CNY 100 billion in the coming three years.